Loan payment protection insurance
A guide to loan payment protection insurance
The ‘want it now’ age of easy credit that has seen UK consumers rack up well over one trillion pounds of debt has provided lenders with no shortage of opportunity to line their pockets by selling loan payment protection insurance.
The product, which protects loan repayments for up to a year if policyholders are unable to work as a result of ill health or involuntary unemployment, can undoubtedly have a valuable role to play when it is sold at a reasonable price. But the problem has been that lenders have been guilty of profiteering, charging exorbitant premiums to those who are already in debt and can therefore least afford to pay them.
The good news, however, is that a new age-related form of loan payment protection insurance offered by some specialist providers has made loan payment protection insurance cover dramatically less expensive for younger policyholders.
It is therefore essential that anyone wishing to take out loan payment protection insurance realises that they are under no compulsion to buy the cover from the same organisation that is providing them with the loan.
Lenders are most unlikely to volunteer this information because they know that doing so could cost them juicy commissions on loan payment protection insurance policies that they could sell alongside loans.
Indeed some lenders even resort to the underhand tactic of automatically including the cost of your loan payment protection insurance in the quote they give you for your loan repayments.
How Does It Work?
In most respects the age-related product works along similar lines to standard loan payment protection insurance. The policyholder pays a monthly premium in return for the reassurance that their loan repayments will be covered by their policy if they are unable to work as a result of accident, sickness or involuntary unemployment.
As with a standard loan payment protection policy, premiums are not affected by a policyholder’s occupation, gender or smoking habits. The big difference, however, is that a standard loan payment protection insurance policy also disregards age when setting premiums, but the age-related policy does not.
This means that young and middle aged policyholders can often obtain far more favourable terms than from a standard loan payment protection insurance policy. Indeed some can be charged well under half the premiums they would be charged by a policy sold by a loan provider.
The reason that specialist providers which offer the age-related loan payment protection insurance cover are able to quote such attractive rates is that they know that younger policyholders make fewer claims. A wealth of underwriting data proves that they are less likely to go seriously ill, that they recover more quickly from physical injuries and that, if they lose their job, they are likely to take less time to find a new one.
Policyholders are quoted premiums based on the amount of cover they choose and on their age. The age that helps determine the premium rate is the policyholder’s age when the loan payment protection insurance policy is taken out, and it is important to realise that premiums will not automatically increase just because the policyholder gets older.
Because age-related loan payment protection insurance policies are only offered by certain highly specialist providers, their quality of cover also tends to be higher than that of loan payment protection insurance policies sold by many loan providers. Of particular importance is the fact that loan providers’ loan payment protection insurance policies often do not pay out until after an initial 60 day exclusion period, whereas the age-related cover pays out after only 30 days and backdates payment to day one.
Be Aware Of The Downsides
Nevertheless, it is important to be aware that age-related loan payment protection insurance is not entirely without its downsides, and these should receive very careful consideration from any potential purchasers.
There is no actual guarantee that a premium quoted at outset will remain fixed throughout the loan period. This is because the loan payment protection insurance provider could increase or decrease premium rates for all policyholders if it finds that its overall claims costs are turning out to be higher or lower than originally forecast.
The fact that cover only pays out for a maximum of 12 months is another highly significant limitation. This should be long enough for most young people to get a new job but it could leave those who suffer serious illnesses or injuries without cover for many years. Repayments of personal loans can be scheduled to take place over seven years, or even 10 years. If the loan is secured against the home the repayment period could be 25 years.
Anyone who finds this a concern should pay due attention to an alternative product called ‘income protection insurance’, which provides much longer-term health cover but does not provide any cover at all for involuntary unemployment.
Unlike with loan payment protection insurance, each income protection insurance applicant is normally underwritten individually, with insurers taking into account factors such as smoking habits, medical history, gender and occupation – as well as age. The extent to which income protection insurance seems good value is therefore likely to vary from case to case as some applicants will be offered far more attractive terms than others.
Important Exclusions
Age-related loan payment protection insurance has the same exclusion clauses as other loan payment protection insurance, and these can place certain policyholders at a very definite disadvantage.
Of particular importance is the fact that medical conditions that existed prior to the start of the policy (so-called “pre-exiting conditions”) are not covered – although this exclusion is waived if you have not suffered from the medical condition in question for two years before the first date on which you become unable to work.
No-one with an ongoing medical condition should underestimate the significance of this. For example, if you are well enough to work but are taking medication for depression at the time you take out your loan payment protection insurance policy, you will not be covered if your condition deteriorates during the next two years to an extent that makes a specialist doctor feel it is necessary to sign you off work.
The loan payment protection insurance cover is also undoubtedly less attractive to self-employed individuals than to employed ones, because the self-employed are only covered for involuntary unemployment if they actually cease trading, as opposed to merely experience a lean patch. Even employed people might take issue with the fact that they are not covered for voluntary redundancy, because in certain industries this has become a common way of exiting employment.
Other important exclusions to be aware of include:
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Any claims you knew you were going to make at the time you took out loan payment protection insurance cover.
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Self-inflicted injury, including those resulting from drugs and alcohol abuse.
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Involuntary unemployment when you were not in continuous work for six months immediately before your employment ended.
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Involuntary unemployment when misconduct has contributed to your dismissal.
Who Needs Loan Payment Protection Insurance Cover?
But, despite these drawbacks, the age related loan payment protection insurance cover can be so inexpensive that many people are likely to conclude that it is not worth risking being without it. Even those with pre-existing medical conditions or self-employed individuals may feel that they are still getting value for money despite realising that they are affected by highly significant exclusions.
No-one can be sure that they will not be the victim of an unfortunate accident or be diagnosed with a serious illness, and job security is hard to come by in the current marketplace. There is so much corporate restructuring going on that even the most experienced, talented and loyal employees can suddenly find themselves surplus to their company’s requirements.
Furthermore, the state support available for those who do become unable to work is far less generous than widely imagined.
The exact level of state benefits that you will be entitled to will depend on factors such as your age, savings levels, housing situation and the number of dependants you have. Whatever you receive will hopefully prevent you and your family from actually starving but it is most unlikely that there will be anything left over to put towards meeting loan repayments.
The consequences of defaulting on a loan can be very severe. You can end up on a credit blacklist, and this can affect your ability to take out other loans in the future or even to benefit from interest-free deals available on the High Street. If the loan in question is a secured one you could even lose your home.
Consequently many people with loan commitments who lose their jobs end up taking out further loans to repay existing ones, but this is a decidedly slippery slope to embark upon and it can often end up at the bankruptcy courts. Taking out loan payment protection insurance, however, can help to safeguard against this happening.
The age-related loan payment protection insurance is likely to prove the best value form of loan payment protection insurance for those who haven’t yet reached their mid 40’s, and it can still prove better value than products offered by many loan providers for those who are older still.
Nevertheless, if you are in your 50’s and 60’s, you could find that you are better off with a standard loan payment protection insurance policy offered by a specialist provider. These are capable of significantly undercutting standard loan payment protection insurance policies offered by loan providers and of providing a higher quality of cover.
Still not sure about loan payment protection insurance?
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